Statutory report - Explanatory Statement BHP Steel Limited was a wholly owned subsidiary within the BHP Billiton group for the entire year and as at. In order to implement the demerger and public listing of its steel business on 22 July 2002, BHP Billiton reorganized its steel business. Various legal entity structure changes were required within the BHP Billiton group both during and subsequent to the financial year ended to give effect to this reorganisation. The Financial Report presented in this report has been prepared for the consolidated entity as it existed on in accordance with the Corporations Act 2001. It is not reflective of BHP Steel Limited which demerged from BHP Billiton. At, and for periods during the financial year, certain significant operating assets were owned by other entities within the BHP Billiton group. These included the Port Kembla Steelworks, North Star BHP Steel, New Zealand Steel, Packaging Products, and certain Asian coating operations. The Financial Report presented reflects the majority of the Australian and Asian coating operations. The Directors' Report and Corporate Governance Statement do, however, reflect the policies BHP Steel Limited has put in place subsequent to public listing. Shareholders wanting additional financial information on the entire BHP Steel group which demerged from BHP Billiton are encouraged to refer to the Scheme Booklet issued by BHP Billiton on 13 May 2002 and the Annual Earnings Report prepared on a pro-forma basis which was lodged with the Australian Stock Exchange on 7th August 2002 and is available on our web site (www.bhpsteel.com).
ABN 16 000 011 058 Statutory report - Contents Page Corporate directory 1 Directors' report 3 Corporate governance statement 17 Financial report 26 31 Directors' declaration 68 Independent audit report to the members 69 Shareholder information 70
Corporate directory Directors G J Kraehe Chairman R J McNeilly Deputy Chairman K C Adams Managing Director and Chief Executive Officer J Crabb D J Grady H K McCann P J Rizzo Secretary Executive leadership team M G Barron Managing Director and Chief Executive Officer K C Adams President Australian Building and Manufacturing Markets N Cornish President Asian Building and Manufacturing Markets M Courtnall President Market and Logistics Solutions K Fagg President Industrial Markets L Hockridge Chief Financial Officer B Kruger Notice of annual general meeting The annual general meeting of BHP Steel Limited will be held at time Melbourne Park Function Centre Batman Avenue Melbourne, Victoria 2 pm date Monday 18 November 2002 Principal registered office in Australia Share registrar Level 11, 120 Collins Street Melbourne, Victoria 3000 (03) 9666 4000 ASX Perpetual Registrars Ltd Level 4, 333 Collins Street Melbourne, Victoria 3000 (03) 9615 9800-1 -
Corporate directory Auditor Stock exchange listing Website address Ernst & Young Chartered Accountants 120 Collins Street Melbourne, Victoria 3000 BHP Steel Limited shares are listed on the Australian Stock Exchange. www.bhpsteel.com - 2 -
Directors' report Your directors present their report on the consolidated entity ("BHP Steel group") consisting of BHP Steel Limited and the entities it controlled at the end of, or during, the year ended. As at, BHP Steel Limited was a wholly owned subsidiary within the BHP Billiton group. On 22 July 2002, BHP Steel Limited demerged from the BHP Billiton group, having listed on the Australian Stock Exchange on 15 July 2002. General purpose consolidated financial statements have been prepared in accordance with the requirements of a public company which is a wholly owned subsidiary of another Australian company.` The financial statements are not reflective of the results of BHP Steel Limited and its subsidiaries which demerged from the BHP Billiton group on 22 July 2002, and which were reported in the Annual Earnings Report dated 7 August 2002. Those results were produced on a pro-forma basis as certain operations which now form part of BHP Steel group were owned by other entities within the BHP Billiton group for all or part of the financial year ended. Directors The following directors were appointed on 10 May 2002 and continue in office up to the date of this report: G J Kraehe R J McNeilly K C Adams J Crabb D J Grady H K McCann P J Rizzo The following directors who were all executives of the BHP Billiton group resigned their directorship during the year: J W Cleary (resigned 10 May 2002) M Courtnall (resigned 10 May 2002) B G Kruger (appointed 20 August 2001, resigned 10 May 2002) G Warner (resigned 10 May 2002) C Weatherstone (resigned 10 May 2002) W R Saxelby (resigned 19 October 2001) W G Johnston (resigned 13 August 2001) Principal activities and significant changes to the state of affairs During the year the principal continuing activities of the consolidated entity, based principally in Australia and Asia, were: (a) manufacture and distribution of metallic coated steel products, and (b) manufacture and distribution of steel building products. The nature of the activities of the consolidated entity remained largely unchanged during the year. However, in preparation for the demerger from the BHP Billiton group there were a number of changes to subsidiary companies in the BHP Billiton group that impacted BHP Steel Limited. The major changes were as follows: (a) (b) The company converted from a proprietary company to a public company and changed its name from BHP Steel (JLA) Pty Ltd to BHP Steel Limited on 8 February 2002. A number of significant operating entities previously owned by related entities within the BHP Billiton group were acquired by BHP Steel Limited. These included: (i) BHP Steel Investments Inc, the company owning a 50% interest in North Star BHP Steel, a steel mini-mill located in Delta, Ohio USA, was acquired on ; (ii) PT BHP Steel Indonesia, the company owning a 74% interest in a metallic coating facility in Indonesia, was acquired on 22 April 2002; (iii) Steel Building Products (Shanghai) Ltd, the company owing a 100% interest in a steel building products facility in China, was acquired on 15 February 2002; (iv) BHP Steel Building Products (Guangzhou) Ltd, the company owing a 100% interest in a steel building products facility in China, was acquired on 15 February 2002; and (v) BHP Steel Building Products Vietnam Ltd, the company owning a 100% interest in a steel building products facility in Vietnam, was acquired on 24 April 2002. - 3 -
Directors' report Dividends During the financial year ended there were no dividends paid or declared by BHP Steel Limited to its shareholder, BHP Billiton Limited. Matters subsequent to the end of the financial year Since, as part of the demerger from the BHP Billiton group, the following significant events have occurred: (a) BHP Steel Limited acquired all the issued capital of BHP Steel (AIS) Pty Ltd from BHP Billiton Limited on 3 July 2002. BHP Steel (AIS) Pty Ltd is a fully integrated manufacturer of flat steel products for distribution to Australian customers, including BHP Steel Limited, and export customers throughout the world. In addition, a wholly owned subsidiary of BHP Steel (AIS) Pty Ltd (which is now part of the BHP Steel group) manufactures flat and coated steel products in New Zealand; (b) On 1 July 2002, the BHP Steel group drew down $550 million of external long term debt and $15 million of short term debt to partially repay related party debt owing to the BHP Billiton group; and (c) BHP Steel Limited legally separated from the BHP Billiton group on 22 July 2002, having listed on the Australian Stock Exchange on 15 July 2002. The remaining related party debt owing to the BHP Billiton group was converted to share capital. Review of operations Segment revenues Segment results 2002 2002 $m $m Hot Rolled Products - (10.8) Coated Products Australia 1,967.0 49.5 Coated Products Asia 421.6 54.6 New Zealand Steel 16.4 0.3 Corporate and Group 201.5 (74.6) Intersegment eliminations (117.8) 2.3 Operating revenue 2,488.7 Operating EBIT 21.3 Less: Net unallocated expenses 38.6 Profit/(loss) from ordinary activities before income tax (17.3) Income tax expense/(credit) (21.1) Profit from ordinary activities after income tax expense 3.8 Less: Net profit attributable to outside equity interest 14.1 Net profit/(loss) attributable to members of BHP Steel Limited (10.3) - 4 -
Directors' report Review of operations The comparison of operating EBIT compared to the pro-forma EBIT reported in the Annual Earnings Report dated 7 August 2002 is as follows: BHP Steel group operating EBIT 21.3 Plus pro-forma adjustments: Earnings from steel operations owned by BHP Billiton group subsidiaries other than BHP Steel Limited (1) 139.0 Asset write-downs (2) 10.2 Net corporate allocations (3) (10.5) BHP Steel group pro-forma EBIT 160.0 (1) Relates to the Port Kembla Steel works, New Zealand Steel, Packaging Products, North Star BHP Steel and various Asian operations. (2) Related to normalisation of one-off asset write-downs to recoverable value. (3) Relates to the net difference between actual corporate charges in BHP Steel Limited and the estimated corporate costs for BHP Steel as an independent company. The year was challenging for the global steel industry. BHP Steel is proud of its performance relative to the industry and has successfully managed many significant business issues during a year characterised by sustained record low global steel prices, the imposition of tariffs and quotas in our most important export markets, global economic weakness due to uncertainty post-september 11, costly industrial action in Australia, a strengthening Australian dollar relative to the US dollar and the complexity of severing an 87-year relationship with the BHP Billiton group. During the year, the BHP Steel group increased volumes to our Australian customers where it saw strong demand in the Australian building market and has continued to build customer confidence in the Company's selected markets. The BHP Steel group has also seen continuing profitability from its Asian businesses. The Company has begun to benefit from a range of cost reduction programs and productivity gains. Likely developments and expected results of operations Looking forward the Company will focus on its strategy of: being an excellent manufacturer and low cost operator of steel assets by implementing a range of initiatives aimed at reducing costs, improving productivity and ensuring that it makes efficient use of capital; enhancing its leadership in selected markets by building upon its strong market position, particularly in its highervalue metallic coated and painted steel products; moving further towards value-added products, solution and services by introducing a number of initiatives to provide solutions and services for specific customers and markets; continuing to be a competitive and valued supplier of intermediate products; and selectively pursuing value-creating growth opportunities, particularly in Asia but also in Australia, New Zealand and North America. Additional information on likely developments in the operations of the Company and the expected results of operations have not been included because the directors believe it would be likely to result in unreasonable prejudice to the Company. EBIT 2002 $m - 5 -
Directors' report Information on directors Graham Kraehe Chairman Age 60, BEc Graham Kraehe is Chairman of the BHP Steel Board. He has a strong background in manufacturing and was the managing director and chief executive officer of Southcorp Limited from 1994 to February 2001. Mr Kraehe is currently a board member of News Corporation, Brambles Limited, National Australia Bank Limited and Djerriwarrh Investments Limited and was formerly a board member of Email Limited. Previously, he held positions as managing director of Pacifica Limited and is a former chairman of NIES, former director of the Business Council of Australia and former national president of the Metal Trades Industry Association. Ron McNeilly Deputy Chairman Age 59, BCom, MBA, FCPA Ron McNeilly is Deputy Chairman of the BHP Steel Board. Mr McNeilly has over 30 years of experience in the steel industry. He joined BHP Billiton in 1962 and previously held positions including Executive Director and President BHP Minerals, Chief Operating Officer, Executive General Manager and Chief Executive Officer BHP Steel, General Manager Transport, General Manager Long Products Division and General Manager Whyalla Works. He is the Chairman of Melbourne Business School Limited and Ausmelt Limited, Deputy Chairman of Worley Group Limited, a director of Loomis Limited, GH Michell & Sons Holdings Pty Limited and a former director of QCT Resources Limited and Tubemakers of Australia Limited. Mr McNeilly is also vice president of the Australia Japan Business Cooperation Committee and a member of the Council on Australia Latin America Relations. Kirby Adams Managing Director and Chief Executive Officer Age 46, BSc (Ind Eng), MBA Kirby Adams was appointed Chief Executive Officer of BHP Steel in March 2000. Mr Adams joined BHP Billition in 1995 and has held positions including President BHP Services, Group General Manager and Chief Executive Officer BHP Service Companies, and Corporate General Manager Planning and Development. He is currently Vice Chairman of the International Iron and Steel Institute and a former president and chief executive officer of Titanium Metals Corporation, the world's largest titanium metals company. John Crabb Non-executive director Age 62 John Crabb has over 30 years of experience in the metals industry and was managing director and chief executive officer of Simsmetal Limited from 1988 until 2002. He joined the Simsmetal Group in 1965 and held a variety of line management positions with the group during his career. Mr Crabb is currently a director of MIM Holdings Limited and is Chairman of Capral Aluminium Limited. Mr Crabb recently retired as chairman of Australian Refined Alloys Limited. Diane Grady Non-executive director Age 54, BA (Hons), MA (Chinese Studies), MBA Diane Grady has been a full time non-executive director of various companies since 1994. She is currently a director of Woolworths Limited, Wattyl Limited and the Lend Lease US Office Trust and was formerly a director of Lend Lease Corporation Limited. She is also a trustee of the Sydney Opera House, a director of the Australian Institute of Management (New South Wales) and a governor of Ascham School. Previously, Ms Grady was a partner with McKinsey & Co where she spent 15 years consulting to clients in a broad range of industries on strategic and organisational issues. - 6 -
Directors' report Information on directors Kevin McCann Non-executive director Age 61, BA LLB (Hons), LLM Kevin McCann is Chairman of Allens Arthur Robinson (formerly Allen Allen & Hemsley). He was appointed as a partner in 1970, and now specialises in mergers and acquisitions, mineral and resources law and capital markets transactions. Mr McCann is Chairman of Healthscope Limited, Origin Energy Limited, Macquarie Communications Infrastructure Group, Triako Resources Limited, and the Sydney Harbour Federation Trust. He is a director of Macquarie Bank Limited and other listed companies and has served on the boards of Pioneer International Limited, Ampol Limited and the State Rail Authority of New South Wales. He is also a member of the Takeovers Panel. Paul Rizzo Non-executive director Age 57, BCom, MBA Paul Rizzo has broad experience in general management, finance and banking as a chief executive officer and director and is currently Dean, Director and Professorial Fellow of the Melbourne Business School. He is a director of NM Rothschild & Sons (Australia) Limited, NM Rothschild Australia Holdings Pty Limited and a member of the advisory board of Mallesons Stephen Jaques. Previously, Mr Rizzo held positions as Group Managing Director - Finance and Administration of Telstra Corporation Limited, Chief General Manager - Retail Banking Commonwealth Bank of Australia, Chief Executive Officer of State Bank of Victoria, and held a range of senior executive positions at Australia and New Zealand Banking Group Limited. He has also previously served as Chairman of Foxtel Management Pty Limited and as a director of IBM Global Services Australia Limited. Director Particulars of directors' interests in shares and options of: BHP Steel Limited Ordinary shares Share right options G J Kraehe 104,547 - K C Adams 302,212 1,175,500 J Crabb 31,428 - D J Grady 15,000 - H K McCann 10,000 - R J McNeilly 412,056 - P Rizzo 12,500 - - 7 -
Directors' report Meetings of directors Prior to 10 May 2002, a Board comprising senior executives met from time to time to transact the Company's business as a wholly owned subsidiary of BHP Billiton. Since the Company was wholly-owned throughout the year, it is not required to report the meetings held during the year. While the Company remained a wholly-owned subsidiary of BHP Billiton until after, the attendance of the current directors, at Board and committee meetings, since their appointment on 10 May 2002 to is as follows: Full meeting of directors Meetings of committees Audit and risk Public listing A B A B A B G J Kraehe 3 3 * * * 3 K C Adams 3 3 * * * 3 J Crabb 3 2 * * * 1 D J Grady 3 2 * * * 2 H K McCann 3 2 1 1 3 3 R J McNeilly 3 3 1 1 3 2 P Rizzo 3 3 1 1 3 3 Notes: All current directors of the Company were appointed on 10 May 2002, in anticipation of the establishment of the Company as a separate independent entity from the BHP Billiton group (which occurred on 22 July 2002). A = Number of meetings held during the period from 10 May 2002 to B = Number of meetings attended from 10 May 2002 to while the director was a member of the Board or the committee * = Not a member of the relevant committee The Health, Safety and Environment Committee and the Remuneration Committee did not meet during the period 10 May 2002 to. The Remuneration Committee met on two occasions prior to the formal appointment of the directors on 10 May 2002. The Public Listing Committee met on eleven occasions prior to the formal appointment of the directors on 10 May 2002 and on two occasions after. - 8 -
Directors' report Non-executive directors' remuneration Non-executive directors receive a set fee per annum and are fully reimbursed for any out of pocket expenses incurred on behalf of the Company. Non-executive directors, other than the Chairman and Deputy Chairman, who serve as Chairman of a Board committee are also paid $10,000 per annum for each Board committee on which they sit as chair. Compulsory superannuation contributions on behalf of each director are paid, in addition to the fees. Non-executive directors do not receive any other retirement benefits. For the year ended, non-executive directors have been remunerated on a pro rata basis from the time they commenced as directors on 10 May 2002. The annual non-executive directors' remuneration is as follows: Name Director's base Superannuation Committee fees Total fee $pa $pa $pa $pa G J Kraehe 280,000 25,200-305,200 D J Grady 100,000 9,900 10,000 119,900 P J Rizzo 109,900-10,000 119,900 R J McNeilly 140,000 12,600-152,600 H K McCann 100,000 9,900-109,900 J Crabb 100,000 9,900 10,000 119,900 Senior executives' remuneration For the entire year ended, BHP Steel executives were employed by the BHP Billiton group. Some ongoing remuneration arrangements for BHP Steel executives reflect policies applicable to those executives while they were employed by the BHP Billiton group. Commitments were made to BHP Steel executives in connection with the demerger and public listing that certain existing remuneration arrangements would be maintained. Following the demerger, BHP Steel's remuneration policy is directed at underpinning a high performance organisation. The focus of it's remuneration strategy is on performance and accountability. Executive remuneration packages are designed to support the delivery of outstanding returns for shareholders by aligning performance related reward with the value delivered to shareholders. To compete BHP Steel must be able to attract and retain the very best talent that is available within the global steel industry, while maintaining shareholder value. Our remuneration strategy enables us to: Compete for executive talent by providing competitive remuneration; and Maintain an appropriate "at risk mix" in total remuneration to ensure we deliver superior performance and grow shareholder value. The reward structure combines base salary, short-term and long-term incentive plans and post-retirement benefit arrangements. The cost and value of components of the remuneration package are considered as a whole and are designed to ensure an appropriate balance between fixed and variable performance-related components, linked to short-term and longterm objectives and to reflect market competitiveness. Details of the policy applied in each component are outlined below. Base salary Base salaries are quantified by reference to the scope and nature of an individual's role, performance, experience and market data. Base salary drives the ultimate delivery of total remuneration including both short-term and long-term incentive targets. Market data is obtained from external sources to determine the market value of positions. - 9 -
Directors' report Senior executives' remuneration Incentive plans The Short-Term Incentive Plan (STIP) is an annual cash based scheme. Goals are established for each participant under the following categories: Shareholder Value Delivery - financial performance measures are used including Earnings per Share, Cashflow, Earnings Before Interest Tax, Shareholder Value Added and Operating Cashflow. Zero Harm - safety and environmental performance measures, including Lost Time Injury Frequency Rates, Medical Treatment Injury Frequency Rates and environmental measures. Business Excellence - performance measures for the financial year ending 30 June 2003 are focused on delivery performance, reducing days of inventory and reducing the cost of poor quality product. Strategy - implementation of specific initiatives. All participants of the STIP have a weighting of 60% of their bonus on the Shareholder Value measures. For executives target bonus levels range from 20% of base salary to 100% of Base Salary and are set to reflect market competitiveness. For outstanding results participants may receive up to 150% of their target bonus amount. Long Term Incentive Plan - BHP Steel executives were excluded from participation in the BHP Billiton Long Term Incentive Plan Award made in October 2001. Rather, a commitment was made to these executives by BHP Billiton that a Long Term Incentive Plan Award would be made by BHP Steel upon public listing in lieu of the Awards that would otherwise have been made. A further commitment was made by BHP Billiton that a Long Term Incentive Plan Award, on terms generally similar to the terms of the award made upon public listing, except for the performance period, would be made in September 2002. The BHP Steel Board established the performance hurdles for the Public Listing Award made in July 2002. In regard to the September Award the Board made determinations on the type, quantum, time period and performance hurdles applicable to the award. In doing so the Board took into account contractual commitments and issues being debated relating to executive long-term incentive plans. Post-retirement benefits BHP Steel has established the BHP Steel Superannuation Fund for Australian participants. This provides for defined benefit and defined contribution participants. The defined benefit plan is no longer available to new members. Under the defined contribution plan, the Company currently contributes 9 per cent of salary into the superannuation fund for employees. In addition, the Company will contribute additional amounts where the employee makes a personal contribution. BHP Steel Australian employees have the choice of having employee and Company contributions made to the Superannuation Trust of Australia. BHP Steel operates a defined benefit plan superannuation fund for its New Zealand Steel employees. Contributions are also made to other international superannuation plans for employees outside of Australia and New Zealand. - 10 -
Directors' report Senior executives' remuneration Details of Senior Executives' (including Executive Director) Remuneration For the entire year ended, BHP Steel executives were employed by BHP Billiton to manage its steel division. In light of the subsequent demerger of BHP Steel, the directors believe details of the actual remuneration packages for the current senior executives for the year ended 30 June 2003 provide more meaningful information than actual remuneration paid by BHP Billiton for its steel executives for the year ended. The following information represents the annual salary package for the year ended 30 June 2003 for the top five senior executives and the executive director. Name Annual base salary Annual cash bonus range (1) Super - annuation Other benefits Total 2003 (range) Long term incentive plan fair value (2) $pa $pa $pa $pa $pa $ Executive Director K C Adams - Managing Director and CEO 1,300,000 0 to 1,950,000 191,100 - Executives L E Hockridge - President Industrial Markets 550,000 0 to 495,000 80,850 8,000 K Fagg - President Market and Logistics Solutions 490,000 0 to 441,000 68,600 110,000* N Cornish - President Australian Building and Manufacturing Markets 420,000 0 to 315,000 61,740 3,000 B G Kruger - Chief Financial Officer 420,000 0 to 378,000 61,740 125,500** M Courtnall - President Asian Building and Manufacturing Markets 335,000 0 to 251,250 49,245 3,000 1,491,100 to 3,441,100 942,133 638,850 to 1,133,850 373,053 668,600 to 1,109,600 332,376 484,740 to 799,740 284,836 607,240 to 985,240 284,836 387,245 to 638,495 227,204 (1) Refer to page 10 for details on the executive short-term incentive plan. (2) If performance hurdles are met, the awards made under the Long Term Incentive Plan will vest in September 2004 and September 2005. No award entitlements occur in the year ending 30 June 2003. Refer to pages 12 to 14 for details on the 'fair value' of share rights granted. * As part of a sign-on bonus agreed by BHP Billiton in December 2000, K Fagg is entitled to receive $110,000 in December 2002. ** A payment of $105,000 has been made to B G Kruger in recognition of his contribution in respect of the implementation of the demerger of BHP Steel Limited from the BHP Billiton group. - 11 -
Directors' report Share options granted to directors and the most highly remunerated officers As at, BHP Steel Limited executives participated in various BHP Billiton group executive incentive plans. Upon demerger, BHP Steel Limited implemented its own performance based executive plans incorporating the granting of share rights. The following share rights have been granted subsequent to the end of the financial year ended. (a) July 2002 Award Nominated Executives were awarded Share Rights (SR's) in BHP Steel Limited in lieu of the awards that would otherwise have been made under BHP Billiton's Long Term Incentive Plans in October 2001. For this award a once-only increase equivalent to an additional 50% of the value of the award was made. This once-only increase was to recognise that, but for the Steel demerger, the nominated employees would have been eligible to an award under the BHP Billiton's Long Term Incentive Plans in October 2001, and the first performance period under the BHP Steel Long Term Incentive Plan will be shorter than the three year period usually adopted under the BHP Billiton plan. A Share Right is a right to acquire an ordinary share in BHP Steel Limited at a later date, subject to the satisfaction of certain performance criteria. Performance Period Under the July Award there are two potential performance periods. The first performance period commenced on 15 July 2002 and ends on 30 September 2004. The BHP Steel Board will determine whether there will be a second performance period. If such a determination is made the second performance period will commence on 15 July 2002 and end on 30 September 2005. Vesting The proportion of SR's that vest at the end of the relevant performance period will be determined by the Company's performance measured in terms of Total Shareholder Return ("TSR"), relative to the TSR of the companies in the ASX 100. The TSR performance hurdle, and percentages of SR's that become exercisable on meeting the performance hurdle is as follows: Exercise Price TSR Performance Hurdle First Performance Period % of Share Rights that Vest Second Performance Period % of Share Rights that Vest 80th - 100th percentile 100% 50% 70th - < 80th percentile 90% 50% 60th - < 70th percentile 70% 50% 50th - < 60th percentile 50% 50% < 50th percentile 50% of SR's awarded will lapse and 50% will be carried over to a second performance period at the Board's discretion None - all unvested SR's will lapse immediately The exercise price established for the Market Priced Share Rights was based on the volume weighted average price of the BHP Steel shares sold under the sale facility and BHP Steel shares traded on the ASX during the first five trading days. Selected executives received SR's with a nil exercise price. - 12 -
Directors' report Share options granted to directors and the most highly remunerated officers Details of the July 2002 Award Market Price Share Rights Nil Priced Share Rights Grant Date 25 July 2002 25 July 2002 Exercise Date From 30 September 2004 From 30 September 2004 Latest Expiry Date 25 July 2007 31 March 2006 Share Rights Granted 14,335,000 2,800,300 Number of Participants 105 12 Exercise Price $2.85 $nil Fair Value Estimate at Grant Date (1) $4,443,850 $2,618,281 (1) External valuation advice from PricewaterhouseCoopers Securities Limited has been used to determine the value of the Executive Share Rights. The valuation has been made using the Binomial Option Pricing Model. (b) September 2002 Plan Executives were awarded Share Rights (SR's) over ordinary shares in BHP Steel Limited. These SR's are subject to achievement of performance criteria and other terms on which they were awarded. Performance Period The performance period commenced on 1 October 2002 and ends on 30 September 2005. Vesting The proportion of SR's that vest at the end of the relevant performance period will be determined by the Company's performance measured in terms of Total Shareholder Return ("TSR"), relative to the TSR of the companies in the ASX 100. The TSR performance hurdle, and percentages of SR's that become exercisable on meeting the performance hurdle is as follows: Exercise Price TSR Performance Hurdle % of Share Rights That Vest 80th - 100th percentile 100% 70th - < 80th percentile 90% 60th - < 70th percentile 70% 51st - < 60th percentile 50% < 51st percentile None - all unvested SR's will lapse immediately The Board considered the merits of Nil Exercise Price Share Rights and Market Priced Share Rights, and felt that Nil Exercise Price Share Rights were appropriate for this Award. However this approach may change in the future as remuneration policies continue to be reviewed by the Board. Restriction on sale of Shares Shares acquired under this award cannot be sold by the executive prior to the 30th September 2007. Furthermore, any executives who resign during the two year holding period forfeit any shares acquired under this award. - 13 -
Directors' report Share options granted to directors and the most highly remunerated officers Details of the September 2002 Award Grant Date 30 September 2002 Exercise Date From 1 October 2005 Expiry Date 30 September 2006 Share Rights Granted 4,696,900 Number of Participants 118 Exercise Price Nil Fair Value Estimate at Grant Date (1) $2,888,594 (1) External valuation advice from PricewaterhouseCoopers Securities Limited has been used to determine the value of the Executive Share Rights. The valuation has been made using the Binomial Option Pricing Model. Share rights granted to directors and the top five senior executives subsequent to the end of the financial year ended 30 June 2002 were as follows: Name Number Fair Value (1) Exercise Price Granted Per Share $ $ $ Directors K C Adams 1,175,500 942,133 Nil Executives L E Hockridge 455,800 373,053 Nil K Fagg 406,100 332,376 Nil N Cornish 348,000 284,836 Nil B G Kruger 348,000 284,836 Nil M Courtnall 277,600 227,204 Nil (1) External valuation advice from PricewaterhouseCoopers Securities Limited has been used to determine the value of the Executive Share Rights. The valuation has been made using the Binomial Option Pricing Model. - 14 -
Directors' report Environmental regulation The Company aims to continuously reduce the impact of its activities on the environment, to ensure the impact is neither serious nor long-lasting. An important element of the Company's environmental performance is its commitment to the efficient use of resources, such as water and energy. It strives to ensure they are used as efficiently and responsibly as possible at all operations. The Company's environmental obligations are monitored through an environmental management system. In preparation for the demerger from the BHP Billiton group, an environmental liability assessment of all BHP Steel group sites was undertaken. There were no material environmental issues identified at any of the sites owned by BHP Steel Limited during the year ended. The only site to identify material significant issues was the Port Kembla Steelworks which was acquired by BHP Steel Limited subsequent to the end of the financial year. Three issues were identified: (a) upgrading the sinter plant to improve stack emission quality, which is already being implemented at a total cost of $94 million. It is expected this project will be completed in 2003; (b) possible future control of off-site discharges of waste waters and contaminated groundwater may require the introduction of new water treatment facilities in the next three to five years; and (c) possible future control of hydrogen sulphide emissions from the blast furnace slag granulators. However, this requirement cannot be determined until reliable technical measurement of this emission is available. The issue may not be material if the measurement indicates that emissions are below levels that warrant further reductions. The only significant environmental incidents or prosecutions during, or since, the year ending were at the Port Kembla Steelworks in October 2001, relating to overflow of out of specification water into a local water course resulting in contamination of the creek and a fish kill, as well as air emissions in breach of licence conditions. Prosecutions in respect of this incident for six Tier 2 offences were commenced in the Land and Environment Court in October 2002. The maximum possible fines for these offences is $1.5 million. In addition there was a prosecution at the Port Kembla Steelworks in September 2002 relating to an out-of-specification water discharge incident in March 2000. This resulted in a $55,000 fine. Indemnification and insurance of directors and officers During the financial year ended and up until the demerger on 22 July 2002, the BHP Billiton group insured the directors and secretaries of its controlled entities. Since 22 July 2002, BHP Steel Limited has entered into its own directors' and officers' insurance policies and paid an insurance premium in respect of the insurance policy, to the extent permitted by the Corporations Act 2001. The insurance policy covers those former directors of the Company along with the current directors of the Company (listed on page3). Executive officers and employees of the Company and its related bodies corporate are also covered. In accordance with Rule 21 of the BHP Steel Limited Constitution, the Company, to the maximum extent permitted by law must indemnify any current or former director or secretary of the Company or any of its Subsidiaries, against all liabilities (and certain legal costs) incurred as such a director or secretary to a person, including a liability incurred as a result of appointment or nomination by the Company or Subsidiary as a trustee or as a director, officer or employee of another corporation. The current directors of BHP Steel Limited (listed on page 3) have entered into Director's Access, Insurance and Indemnity Deeds with the Company. The Deed addresses the matters set out in Rule 21 and includes, among other things, provisions requiring the Company to indemnify a director to the extent to which they are not already indemnified as permitted under law, and to use its best endeavours to maintain an insurance policy covering a director while they are in office and 7 years after ceasing to be a director. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors' and officers' liability insurance contract, as (in accordance with normal commercial practice) such disclosure is prohibited under the terms of the contract. - 15 -
Directors' report Rounding of amounts The Company is of a kind referred to in Class Order 98/0100, issued by the Australian Securities and Investments Commission, relating to the 'rounding off' of amounts in the directors' report. Amounts in the directors' report have been rounded off in accordance with that Class Order to the nearest hundred thousand dollars. Auditor Ernst & Young replaced Andersen as auditors for the Company on 9 August 2002. This report is made in accordance with a resolution of directors. G J Kraehe (sgd.) G J Kraehe Chairman K C Adams (sgd.) K C Adams Managing Director & CEO Melbourne 31 October 2002-16 -
Introduction BHP Steel Limited Corporate governance statement BHP Steel Limited became a listed public company on 15 July 2002. Since its listing, the Board has commenced implementing a set of corporate governance policies in line with best practice and will continue to review and develop these policies. The Company also complies with the Corporate Governance Guidance Note published by the Australian Stock Exchange and the statements by participants in the Corporate Governance Council established by the Australian Stock Exchange, dated 15 August 2002. The BHP Steel group is a global organisation, with businesses operating in many countries, including Australia, New Zealand, the United States, China and throughout South-East Asia. This demands that all entities of the BHP Steel group comply with a range of varying legal, regulatory and governance requirements. The Board places great importance on governance of the Company and, in particular, the need to focus on carrying out prudent risk-taking activities which achieve a balance between each of the following: the generation of rewards for shareholders who invest their capital; the supply of goods and services of value to the BHP Steel group's global customers; the provision of meaningful employment for employees; and in a way which contributes to the welfare of the community. This Corporate Governance Statement outlines the key aspects and mechanisms of the Company's governance framework established by the Board (recognising, of course, the importance of continually reviewing and monitoring that framework). Shareholders A fundamental role in the governance of the Company is performed by shareholders who elect the Board. Since their appointment by BHP Billiton Limited on 10 May 2002, one third of the directors must retire each year by rotation and are subject to re-election. The Board's task is to govern on behalf of all shareholders. The Board recognises that, to carry out this role, shareholders must receive high quality relevant information in a timely manner. Timely disclosure of relevant information will facilitate an efficient, competitive and informed market in the Company's shares. The Company is subject to continuous disclosure obligations under the Listing Rules of the Australian Stock Exchange, which are supplemented by Australian corporations legislation. Subject to some limited exceptions, under the continuous disclosure requirements, the Company must immediately notify the market, through the Australian Stock Exchange of any information which a reasonable person would expect to have a material effect on, or lead to a substantial movement in, the price or value of its shares. To achieve these objectives and satisfy the regulatory requirements, since its listing on 15 July 2002, the Board provides or intends to provide information to shareholders and the market in several ways, including: through communications to all shareholders in annual reports and financial statements, the release of results to the Australian Stock Exchange each half year and at the Company's annual general meeting; price sensitive announcements and other relevant significant announcements are released directly to the market via the Australian Stock Exchange. Copies of these announcements are immediately placed on the Company's website, at www.bhpsteel.com; briefings will be conducted with analysts and institutions from time to time - in doing so, BHP Steel recognises the importance of making sure that any price sensitive information provided during these briefings is made available to all shareholders and the market at the same time and in accordance with the requirements of the Australian Stock Exchange and the Australian Securities and Investments Commisssion; and on the Company's website, which contains extensive information about the BHP Steel group and its activities, including statutory reports and investor information. The Company has established a Market Disclosure Committee, comprising the Managing Director and Chief Executive Officer, the Chairman, the Chief Financial Officer, the Company Secretary, the Vice-President, Investor Relations and the Executive Vice-President, Corporate Affairs, to monitor and capture all significant information which may require disclosure. The Company Secretary is responsible for providing announcements to the Australian Stock Exchange. - 17 -
Corporate governance statement The Board of directors The role of the Board The Board is responsible for the effectiveness of governance practices and the overall management and control of all entities within the BHP Steel group. The Board has specifically reserved to itself a number of key matters for the consideration and decision of the Board. These key matters include: the adoption of the strategic direction of the BHP Steel group; succession planning and appointment of key senior executives; remuneration and objective setting for the Managing Director and Chief Executive Officer; employee equity ownership plans; appointment of auditors; approval of the financial statements; approval of the business plans and budgets; approval of risk management strategies; approval of significant capital expenditure; approval of the Company's remuneration policy; review of operating results; and corporate reputation. The Board is assisted in the discharge of its responsibilities by a number of Board committees (details of which appear on pages 20 to 23). The Board has delegated responsibility for the day-to-day operation and administration of the BHP Steel group to executive management, led by the Managing Director and Chief Executive Officer, Mr Kirby Adams. The levels of authority for management are also documented. The Managing Director and Chief Executive Officer is assisted in managing the business by the Executive Leadership Team (refer page 23). The roles of the Chairman and the Managing Director and Chief Executive Officer are separated and clearly defined. Directors are entitled to full access to the information required to discharge their responsibilities, including access to executives of the BHP Steel group. The Board (as well as Board committees and individual directors) may also take independent professional advice in carrying out their responsibilities, including in the absence of the Company's management, where they consider it appropriate to do so. The Board is assisted by the Company Secretary, who advises on the management of meetings, the implementation of governance procedures and compliance with regulatory requirements. Composition of the Board The Board comprises seven directors, including six non-executive directors and one executive director (the Managing Director and Chief Executive Officer). The Board collectively bring significant commercial, business, operational, financial and international experience in a range of industries. The directors all possess skills and expertise which, in aggregate, combine to form a Board with a depth of experience. The directors' biographies are on pages 6 to 7. - 18 -
Corporate governance statement Composition of the Board The Company's Constitution and the Listing Rules of the Australian Stock Exchange require that no member of the Board (other than the Managing Director and Chief Executive Officer) may serve for more than three years without being re-elected by shareholders at an annual general meeting of the Company. Also, one-third of the directors (not including the Managing Director and Chief Executive Officer) must retire - and are eligible to be re-elected by the shareholders - at each annual general meeting. The Managing Director and Chief Executive Officer serves as a director until he ceases to be the Chief Executive Officer. Where the Board itself appoints a person as a director (rather than the shareholders), that person must resign at the next annual general meeting following their appointment and seek approval of shareholders to continue as a director. Board succession planning and training The Board is conscious of the need to ensure that proper processes are in place to deal with succession issues at Board level. This will require the Board periodically to assess the skill-set necessary to meet the BHP Steel group's demands. The Board has established a Nomination Committee, chaired by Mr Graham Kraehe, and comprising all of the non-executive directors. Newly appointed directors will receive appropriate induction and training. Consistent with this, all of the non-executive directors who were appointed on 10 May 2002 have participated in a number of informal meetings to familiarise themselves with the significant operations of the BHP Steel group, including, before and since their appointment, presentations by senior management, the auditors and external advisers. They have all visited the Company's site at Port Kembla and have a program in the year ahead to visit other major operating sites. Board meetings Since the listing of the Company on 15 July 2002, the Board has scheduled to meet at least nine times in the current financial year to review matters such as the financial performance of the BHP Steel group, current trading and key business initiatives, and the BHP Steel group's strategy, budget and business plans. Procedures are also in place to ensure that directors can meet to consider and decide urgent matters, as and when they arise. Materials for Board and Board committee meetings are circulated to the directors in advance. The agenda for meetings is formulated with input from the Managing Director and Chief Executive Officer, the Chairman and the Executive Leadership Team (see page 23). Directors are free to nominate matters for inclusion on the agenda for any Board or Board committee meeting. Presentations to the Board are frequently made by members of senior management, and telecommunication technologies are utilised to enable participation of management. Board meetings have been held in various locations, including in Melbourne (where the Company's head office is located), Sydney and Port Kembla (home to the Company's integrated steelworks operations in Australia). The Board has a program to meet at various sites throughout the year ahead. Non-executive directors are scheduled to meet at least twice a year without the presence of executives. Conflicts of interest The Board is conscious of its obligations to ensure that directors avoid conflicts of interest (both real and apparent) between their duty to the Company and its employees and their own interest. A register of directors' interests is maintained by the Company Secretary. - 19 -
Corporate governance statement Directors' remuneration Under the Company's Constitution the maximum remuneration payable by the Company for the services of non-executive directors in total must not exceed $1,750,000 per annum without shareholder approval. The remuneration paid to the nonexecutive directors in the financial year ended was well under the maximum amount provided in the Constitution and total remuneration to be paid to non-executive directors in the year ending 30 June 2003 will also be below the prescribed maximum. Non-executive directors receive remuneration based on membership of the Board, and for chairing Board committees. Nonexecutive directors do not receive any performance-based incentives and are not entitled to any retirement benefits. Details of remuneration paid to the non-executive directors are set out on page 9. Committees of the Board Given the importance of certain matters to corporate governance, the Board has established a number of committees to assist in the execution of its responsibilities: the Public Listing Committee; the Audit and Risk Committee; the Remuneration Committee; the Health, Safety and Environment Committee; and the Nomination Committee. Other committees of the Board may be formed from time to time to deal with specific matters. Each of the Board's committees operates under terms of reference (charters), detailing their role and responsibilities. The number of Board Committee meetings held during the year ended and the attendance at those meetings by members is set out on page 8. Regular reports of the committees' activities are provided to the Board and minutes are circulated to all directors. Public Listing Committee The Public Listing Committee was formed by the directors designate of BHP Steel Limited in March 2002 to assist the directors to prepare to become directors of the Company, once they were formally appointed by BHP Billiton Limited. After their appointment as directors on 10 May 2002, the Committee continued to meet to assist the Board in discharging its responsibilities to the Company in connection with the public listing of the Company. The members of the Committee were Mr Kevin McCann (Committee Chairman), Mr Ron McNeilly and Mr Paul Rizzo. All Board members were invited to attend meetings of the Public Listing Committee and, on most occasions, a majority of directors did attend. - 20 -